Lancaster County Hospital Surpluses Generate Media Controversy

What’s the difference between 5.15 percent and 13.6 percent? It’s the difference between the average percent of Pennsylvania hospitals’ operating margin in 2017 and that of the operating margins of Lancaster County hospitals. But is this a problem or is it a sign of nonprofits doing their job and having sound business models?

According to Heather Stauffer of LNP Online, “Industry experts say every situation is different, but hospitals generally need an operating surplus of four to six percent to maintain financial stability. In Lancaster County and the surrounding region, four of five hospitals in the last fiscal year had operating margins roughly twice that high.”

For-profit regional hospitals, including Heart of Lancaster Regional Medical Center (now UPMC Pinnacle Lititz) and Lancaster Regional Medical Center (now UPMC Pinnacle Lancaster), each had surpluses in excess of 10 percent. Since they became nonprofits in the last fiscal year when they merged to form UPMC, it is not anticipated that their operating margins will decline.

Lancaster General Health (LGH) has the advantage of leveraging a partnership with Penn Medicine. The problem is the question raised: Wouldn’t LGH’s fiscal responsibility be a significant contribution to the health of the community, creating value-based services?

The Center for Medicare and Medicaid Services (CMS) creates value-based programs as part of a larger quality strategy to reform how health care is delivered and paid for. The programs reward health care providers with incentive payments for the quality of care they give to people with Medicare. Value-based programs support a triple aim:

Improving the patient experience of care (including quality and satisfaction)

Reducing the per capita cost of health care

Improving the health of populations

In 2018, LGH has opened a $63.7 million expansion, including private patient rooms and enhanced technology. The hospital’s spokesperson, John Lines, refers to the investments the hospital makes as meant “to strengthen the health of our community, lower readmission rates and improve clinical outcomes. This often leads to further lowering the total cost of care for our patients.”

LNP reports that Lancaster General Health’s operating revenue surplus has continued to grow since 2012. In the last five years, ending in June 30, 2017, the hospital has taken in an excess of a half billion dollars over its operating expenses, according to the Pennsylvania Health Care Cost Containment Council.

Credit should be given to the hospitals that have been able to realize surplus operating revenue due in part to successfully containing costs. If cost-containment leads to more patient safety, quality, and satisfaction, then, according to LGH, everybody wins. It remains to be seen whether it will be reflected in reduced medical bills.

The editorial board of LNP Online states,

Nonprofit hospitals serve the community—that’s a requirement of maintaining their nonprofit status, and they earn substantial federal, state and local tax breaks to do so. Unfortunately, the community gets a little poorer every time someone tears open a hospital bill.

The real bottom line is this: The most profitable nonprofit hospitals seem out of touch with families and small businesses who are coughing up ever-larger chunks of their income to cover health care costs.

The LNP’s editorial board seems to confuse the bills that patients get in the mail with benefits to the community and community benefit: “Well-heeled hospitals readily point to the free and discounted care they deliver and the payments they make in lieu of taxes. But these represent customary operating expenses that aren’t carving an outsize chunk from anyone’s bottom line.”

Actually, in its 2017 annual report, LGH reported an uncompensated $83 million in community benefit, including expenses incurred while providing access to care for the people who have little or no ability to pay. LGH’s 2016 Community Health Needs Assessment demographics indicate that there are 10,093 families in Lancaster County with incomes below the poverty line. Of families with children, 7,964 live below the poverty line.

A 2017 survey by the Deloitte Center for Health Solutions found that of 300 hospitals and health systems, “The vast majority, 88 percent, were committed to addressing social determinants and were screening patients for social needs. The survey also found 72 percent of hospitals had not made any investments. Nearly 40 percent of hospitals surveyed said they were not measuring the outcomes of their initiatives. Most systems have limited their activities to target a small subset of their patient populations, such as high utilizers, or those who are at risk of becoming frequent [emergency department] visitors.”

LGH is not one of that 72 percent. As a result of the Community Health Needs Assessment, Lancaster General Health identified three priority areas most critical to community health: Mental health, obesity, and substance use. It has put metrics in place to track progress toward its 2020 targets. This summer, it built a freestanding behavioral health hospital in partnership with Universal Health Services, investing $30 million to treat adults with mental health disorders. In short, it would seem that the hospital is following through and investing in the areas that it said it would in order to meet the community needs identified in its health assessment.

Still, LNP reporter Heather Stauffer raises a valid concern that the hospital may be implementing its community benefit strategy without working with the community, writing that, “Some local organizations that provide outpatient behavioral health and drug and alcohol services here said Lancaster General met with them relatively late in the planning process and, despite talk of collaboration, failed to materially ease fears that the new partnership will draw patients and talent away from them.”

What is the bottom line? Without further information, that is hard to say. What can be said with confidence is that higher margins alone are not a sign of failing to serve the community.—Meredith Betz

About The Author

G. Meredith Betz is an organizational consultant and nonprofit executive with leadership experience in development and organizational dynamics in healthcare, arts and culture and education nonprofits. As an executive coach and consultant to nonprofit organizations she trains nonprofit boards best practices in governance and in building a culture of philanthropy within their organizations.